Audit of the Federal Employees Health Benefits Program Operations at Blue Choice

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U.S. OFFICE OF PERSONNEL MANAGEMENT
OFFICE OF THE INSPECTOR GENERAL
OFFICE OF AUDITS
Final Audit Report
Subject:
Audit of the Federal Employees Health Benefits
Program Operations at Blue Choice
Report No. 1C-MK-00-13-052
May 7, 2014
Date:
-- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
AUDIT REPORT
Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
Blue Choice
Contract Number CS 2506 - Plan Code MK
Rochester, New York
Report No. 1C-MK-00-13-052 May 7, 2014
Date: _________________
Michael R. Esser
Assistant Inspector General
for Audits
-- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
EXECUTIVE SUMMARY
Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
Blue Choice
Contract Number CS 2506 - Plan Code MK
Rochester, New York
Report No. 1C-MK-00-13-052 Date: May 7, 2014
The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at Blue Choice (Plan). The audit covered contract years
2010 through 2013, and was conducted at the Plan’s office in Rochester, New York.
This report questions $2,143,534 for inappropriate health benefit charges to the FEHBP in
contract years 2010 through 2012, including $90,303 for lost investment income calculated
through December 31, 2013. We found that the FEHBP rates were developed in accordance
with the Office of Personnel Management’s rules and regulations in contract year 2013.
For contract year 2010, we determined that the FEHBP rates were overstated by $396,332 due to
defective pricing. Specifically, we found an SSSG discount which was not applied to the
FEHBP rates.
For contract year 2011, we determined that the FEHBP rates were overstated by $846,099 due to
defective pricing. Specifically, we found discrepancies in the FEHBP’s medical and prescription
drug benefit adjustment factors, the contract mix factor, the retention base amount, the
preventive services and tobacco cessation loading, the Children’s Loading, and the calculation of
the current rate. We also calculated a slightly higher SSSG discount than the Plan.
i
For contract year 2012, we determined that the FEHBP rates were overstated by $810,800 due to
defective pricing. Specifically, we found discrepancies in the FEHBP’s medical benefit
adjustment factor, the contract mix factor, the retention base amount, and the calculation of the
current rate.
Consistent with the FEHBP regulations and contract, the FEHBP is due $90,303 for lost
investment income, calculated through December 31, 2013, on the defective pricing findings.
The Plan has paid this amount as of February 19, 2014.
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CONTENTS
Page
EXECUTIVE SUMMARY .................................................................................................... i
I. INTRODUCTION AND BACKGROUND .......................................................................... 1
II. OBJECTIVES, SCOPE, AND METHODOLOGY .............................................................. 3
III. AUDIT FINDINGS AND RECOMMENDATIONS ............................................................ 5
Premium Rate Review ..................................................................................................... 5
1. Defective Pricing ........................................................................................................ 5
2. Lost Investment Income .............................................................................................. 8
IV. MAJOR CONTRIBUTORS TO THIS REPORT .............................................................. 10
Exhibit A (Summary of Questioned Costs)
Exhibit B (Defective Pricing Questioned Costs)
Exhibit C (Lost Investment Income)
Appendix (Blue Choice’s January 29, 2014 response to the draft report)
I. INTRODUCTION AND BACKGROUND
Introduction
We completed an audit of the Federal Employees Health Benefi ts Program (FEHBP) operations
at Blue Choice (Plan). The audit covered contract years 2010 through 2013, and was conducted
at the Plan 's office in Rochester, N ew York. The Plan is subject to the Medical Loss Ratio
(MLR) m les and regulations in conu·act years 2012 an d 2013 . The audit was conducted pursuant
to the provisions of Conu·act CS 2506; 5 U.S.C. Chapter 89; and 5 Code of Federal Regulations
(CFR) Chapter 1, Patt 890. The audit was perf01m ed by the Office of Personnel Managem ent 's
(OPM) Offi ce of the Inspector General (OIG), as established by the Inspector General Act of
1978, as amended.
Background
The FEHBP was established by the Federal Employees Health Benefi ts Act (Public Law 86­
382), enacted on September 28, 1959. The FEHBP was created to provide health insurance
benefi ts for federal employees, annuitants, an d dependents. The FEHBP is administered by
OPM's Healthcare and Insurance Office. The provisions of the Federal Employees Health
Benefits Act are implemented by OPM through regulations codified in Chapter 1, Patt 890 of
Title 5, CFR. Health insurance coverage is provided through conu·acts with health insurance
caniers who provide service benefits, indemnity benefi ts, or comprehensive medical services.
Community-rated catTiers patt icipating in the FEHBP m·e subj ect to vm·ious federal, state and
local laws, regulations, and ordinances. While most caniers are subject to state jurisdiction,
many m·e fiuther subject to the Health Maintenan ce Organization Act of 1973 (Public Law 93­
222), as amended (i.e., m any cormmmity-rated catTiers m·e federally qualified). In addition,
patticipation in the FEHBP subjects the can iers to the Federal Employees Health Benefi ts Act
and implementing regulations promulgated by OPM.
The chatt to th e right shows the number of FEHBP Contracts/Members
March 31
FEHBP conu·acts and members reported by th e
Plan as of March 31 for each conu·act year
audited.
For conu·act yem·s 2010 and 2011 , th e FEHBP
should pay a market price rate, which is
defined as the best rate offered to either of the
two groups closest in size to the FEHBP. For
conu·act years 2012 an d 2013, the premium
rates charged to the FEHBP under the MLR
methodology m·e to be developed in
accordance with OPM m les and regulations
and the Plan 's state-fi led standat·d rating
methodology (or if the rating methodology
does not require state filing, the Plan 's
1
documented and established rating methodology). All FEHBP pricing data are to be supported
by accurate, complete, and current documentation. In contracting with community-rated carriers,
OPM relies on carrier compliance with appropriate laws and regulations and, consequently, does
not negotiate base rates. OPM negotiations relate primarily to the level of coverage and other
unique features of the FEHBP.
The Plan has participated in the FEHBP since 1989, and provides health benefits to FEHBP
members in the New York counties of Monroe, Livingston, Wayne, Ontario, Seneca, and Yates.
The last full scope audit of the Plan conducted by our office covered contract years 2006 through
2009. That audit reported $2,486,049 in questioned costs. The Plan agreed with those audit
results and paid the findings in full.
The preliminary results of this audit were discussed with Plan officials at an exit conference and
in subsequent correspondence. A draft report was also provided to the Plan for review and
comment. The Plan’s comments were considered in preparation of this report and included, as
appropriate, in the Appendix.
2
II. OBJECTIVES, SCOPE, AND METHODOLOGY
Objectives
The primary objective of this performance audit was to determine whether the Plan was in
compliance with the provisions of its contract and the laws and regulations governing the
FEHBP. For contract years 2010 and 2011, the primary objective of the audit was to determine
if the Plan offered the FEHBP market price rates based on the rates given to the Similarly Sized
Subscriber Groups (SSSGs). For contract years 2012 and 2013, the primary objective of the
audit was to determine if the Plan offered the FEHBP a fair premium rate, based on its
underwriting guidelines and OPM rules and regulations. We also verified that the loadings to the
FEHBP rates were reasonable and equitable. Additional tests were performed to determine
whether the Plan was in compliance with the provisions of the laws and regulations governing
the FEHBP.
Scope
We conducted this performance audit in accordance FEHBP Premiums Paid to Plan
with generally accepted government auditing
standards. Those standards require that we plan
and perform the audit to obtain sufficient, $30
appropriate evidence to provide a reasonable basis $25
Millions
for our findings and conclusions based on our audit $20
objectives. We believe that the evidence obtained $15
provides a reasonable basis for our findings and $10
conclusions based on our audit objectives. $5
$0
This performance audit covered the FEHBP 2010 2011 2012 2013
Revenue $25.9 $22.5 $22.4 $20.2
premium rates developed and charged for contract
years 2010 through 2013. For these years, the
FEHBP paid approximately $91 million in
premiums to the Plan, as shown on the chart to the right. The audit did not include tests of the
Plan’s 2012 and 2013 MLR calculations, which will remain subject to future audit.
OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
contract, applicable laws and regulations, and OPM’s Rate Instructions to Community-Rated
Carriers (rate instructions). These audits are also designed to provide reasonable assurance of
detecting errors, irregularities, and illegal acts.
We obtained an understanding of the Plan’s internal control structure, but we did not use this
information to determine the nature, timing, and extent of our audit procedures. However, the
audit included such tests of the Plan’s rating system and such other auditing procedures
considered necessary under the circumstances. For contract years 2010 and 2011, our review of
internal controls was limited to the procedures the Plan has in place to ensure that:
3
• The appropriate SSSGs were selected;
• the rates charged to the FEHBP were the market price rates (i.e., equivalent to the best
rate offered to the SSSGs); and
• the loadings to the FEHBP rates were reasonable and equitable.
For contract years 2012 and 2013, our review of internal controls was limited to the procedures
the Plan has in place to ensure that the rates charged the FEHBP are developed in accordance
with the Plan’s standard rating methodology and the claims, factors, trends, and other related
adjustments are supported by accurate, complete and current source documentation.
In conducting the audit, we relied to varying degrees on computer-generated billing, enrollment,
and claims data provided by the Plan. We did not verify the reliability of the data generated by
the various information systems involved. However, nothing came to our attention during our
audit testing utilizing the computer-generated data to cause us to doubt its reliability. We believe
that the available data was sufficient to achieve our audit objectives. Except as noted above, the
audit was conducted in accordance with generally accepted government auditing standards,
issued by the Comptroller General of the United States.
The audit fieldwork was performed at the Plan’s office in Rochester, New York during August
2013. Additional audit work was completed at our office in Cranberry Township, Pennsylvania.
Methodology
For contract years 2010 and 2011, we examined the Plan’s federal rate submissions and related
documents as a basis for validating the market price rates. In addition, we examined the rate
development documentation and billings to other groups, such as the SSSGs, to determine if the
market price was actually charged to the FEHBP.
For contract years 2012 and 2013, we examined the Plan’s standard rating methodology as a
basis for validating its federal rate submissions and related documents. In addition, we verified
that the factors, trends, and other related adjustments used to determine the FEHBP premium
rates were supported by accurate, complete and current source documentation.
We also examined claim payments to verify that the cost data used to develop the FEHBP rates
was accurate, complete, and valid. Finally, we used the contract, the Federal Employees Health
Benefits Acquisition Regulations (FEHBAR), and the rate instructions to determine the propriety
of the FEHBP premiums and the reasonableness and acceptability of the Plan’s rating system.
To gain an understanding of the internal controls in the Plan’s rating system, we reviewed the
Plan’s rating system policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.
4
Ill. AUDIT FINDINGS AND RECOMMENDATIONS
Premium Rate Review
1. Defective Pricing $2,053,231
The Ceiiificates of Accm ate Pricing the Plan signed for contract years 20 10 through 2012 are
defective. In accordance with federal regulations, the FEHBP is therefore due a rate reduction
for these years. Application of the defective pricing remedy shows that the FEHBP is due a
premium adj ustment totaling $2,053,23 1 (see Exhibit A) . We fmmd that the FEHBP rates
were developed in accordance with applicable laws, regulations, and the rate instm ctions in
contract year 2013 .
For contract years 2010 and 2011 , caniers proposing rates to OPM are required to submit a
Ceii ificate of Accurate Pricing celiifying that the proposed subscription rates, subject to
adjustments recognized by OPM, are market price rates. OPM regulations refer to a market
price rate in conj unction with th e rates offered to an SSSG. SSSGs are the Plan's two
employer groups closest in subscriber size to the FEHBP. If it is found that the FEHBP was
charged higher than the market price rate (i.e., the best rate offered to an SSSG), a condition
of defective pricing exists, requiring a downward adj ustment of the FEHBP premiums to the
equivalent market price rate.
For contract years 201 2 and 2013 , MLR caniers proposing rates to OPM are required to
submit a Ceii ificate of Accmate Pricing (MLR Methodology) celiifying that the cost or
pricing data submitted to OPM in supp01i of the FEHBP rates are accm ate, complete, and
cmTent as of the date of the ceii ificate. If it is found th at th e FEHBP was charged higher rates
due to inaccm ate, incomplete or non-cmTent data, a condition of defective pricing exists,
requiring a downward adj ustment of the FEHBP premiums.
We agree with the Plan's selection as the
SSSGs for contract year 2010. The were usmg an commuruty rating
(ACR) methodology. The FEHBP was rated using a traditional community rating (TCR)
methodology. The FEHBP has an HMO product which is required by the state ofNew York
to be rated TCR. The SSSGs have Prefen ed Provider Organization and Point of Seiv ice
products which the state ofNew York allows to be ACR rated. The FEHBP did not receive a
discount to either the high or standard options .
Om analysis of the rates charged to the SSSGs shows tha
received the discmmt ­ did not receive a
calculated a renewal increase of . percent, but only applied
a rate increase percent. represents a discount given to the group. We
also calculated a contract mix factor for the group. The Plan used- while we
calculated the to be . The application of these two variances to om audited
rates results in a l l percent discmmt.
5
We recalculated the FEHBP rates by applying the SSSG discount and determined that the
FEHBP was overcharged for the high option and $ for the standard option.
The FEHBP’s overcharges total $396,332 in contract year 2010 (see Exhibit B).
2011
We agree with the Plan’s selection of as the SSSGs for
contract year 2011. The SSSGs and the FEHBP were rated using ACR. The FEHBP
received a high and standard option in contract year 2011. The Plan applied a percent
SSSG discount to the FEHBP high and standard option rates.
Our audit of the FEHBP rates found the following discrepancies:
• Medical Benefit Adjustment Factor: The Plan did not apply a medical benefit
adjustment factor (BAF) to the experience period claims incurred from February
2009 through December 2009 for the high option. We found the inpatient copay
increased from $100 in 2009 to $240 in 2010. The Plan acknowledged this error and
provided support for the difference, which resulted in a BAF of .
• Prescription Drug Benefit Adjustment Factor: The Plan did not apply a prescription
drug BAF to the experience period claims incurred from February 2009 through
December 2009 for the high option. We found the prescription drug copays
increased from $10/25/40 in 2009 to $10/30/50 in 2010. The Plan acknowledged this
error and provided support for the difference, which resulted in a BAF of
• Contract Mix Factor: The Plan used a contract mix factor of Based on the
support provided by the Plan, we calculated a contract mix factor of
• Retention Base Amount: The Plan used a base Per-Member-Per Month (PMPM)
retention amount of . We found this amount contained a PMPM fee for
“Other Taxes.” Upon further review, the Plan agreed the FEHBP should not be
charged for this cost. We removed the PMPM tax and used a base retention
amount of PMPM in our audited FEHBP rates.
• Current Rate Calculation: The Plan calculated current rates using the line 6 rates
from the prior year’s FEHBP reconciliation. The line 6 rate is the contract rate
which contains adjustments for contingency reserve payments and credits. In our
opinion, the current rate calculation should use the prior year line 5 rates, which
include no such adjustments.
• Preventative Services and Tobacco Cessation: We followed the Plan’s methodology
in calculating the Preventative Services and Tobacco Cessation loadings. Even after
doing so, our audited rates varied significantly from the Plan’s rates. For the high
option, the Plan calculated a single rate, and a family rate. We
calculated a single rate, and a family rate. For the standard option, the
6
Plan calculated single rate, and a- family rate . We calculated a­
single rate, and family rate.
• Children 's Loading: The Plan included an extra children 's load to the family rates of
- for the high option, and ~ for the standard option . However, this
~d in a double loading sinc~cost associated with the overage dependents is
aheady accmmted for in the Line 1 rates. We removed the children' s loading from
our audited FEHBP rates .
We recalculated the FEHBP rates based on our audited variances of the FEHBP rating and by
applying ercent audited SSSG discount, and detennined that the FEHBP was
the high option and ~for the standard option. The
total $846,099 in contract year 2011 (see Exhibit B).
For contract year 2012, we perfonned a rate build-up audit of the FEHBP rates to detennine if
the rates charged to the FEHBP were developed in accordance with the Plan ' s stated standard
rating methodology. The FEHBP was rated using ACR. The FEHBP received a high and
standard option in contract year 2012.
Our audit of the FEHBP rates fmmd the following discrepancies :
• Medical Benefit Adjustment Factor: The Plan applied a medical BAF of- to the
experience period claims incuned from March 20 10 through December 2010 for
both the high and standard options. This factor is intended to cover the extended
coverage of dependents from age 22 to age 26. The Plan could not provide adequate
support for this factor, so we have disallowed it in our audited rate development.
• Contract Mix Factor: The Plan used a contract mix factor of- . Based on the
support provided by the Plan, we calculated a contract mix fa~-·
• Retention Base Amount: The Plan used a bas e PMPM retention amount of- .
We fmmd this ammmt contained a- PMPM fee for "Other Taxes." Upon
ftnther review, the Plan agreed the FEHBP should not be charged for this cost. We
7
removed the PMPM tax and used a base retention amount of PMPM in
our audited FEHBP rates.
• Current Rate Calculation: The Plan calculated current rates using the line 6 rates
from the prior year’s FEHBP reconciliation. The line 6 rate is the contract rate
which contains adjustments for contingency reserve payments and credits. In our
opinion, the current rate calculation should use the prior year line 5 rates, which
include no such adjustments.
We recalculated the FEHBP rates based on our audited variances of the FEHBP rating and
determined that the FEHBP was overcharged for the high option and for
the standard option. The FEHBP’s overcharges total $810,800 in contract year 2012 (see
Exhibit B).
Plan’s Comments (see Appendix):
The Plan elected to pay the defective pricing findings in full.
Recommendation 1
We recommend that the contracting officer require the Plan to return $2,053,231 to the
FEHBP for defective pricing in contract years 2010 through 2012. On February 19, 2014, the
Plan paid the recommended defective pricing recovery in full.
2. Lost Investment Income $90,303
In accordance with FEHBP regulations and the contract between OPM and the Plan, the
FEHBP is entitled to recover lost investment income on the defective pricing findings in
contract years 2010 through 2012. We determined the FEHBP is due $90,303 for lost
investment income, calculated through December 31, 2013 (see Exhibit C).
FEHBAR 1652.215-70 provides that, if any rate established in connection with the FEHBP
contract was increased because the carrier furnished cost or pricing data that was not
complete, accurate, or current as certified in its Certificate of Accurate Pricing, the rate shall
be reduced by the amount of the overcharge caused by the defective data. In addition, when
the rates are reduced due to defective pricing, the regulation states that the government is
entitled to a refund and simple interest on the amount of the overcharge from the date the
overcharge was paid to the carrier until the overcharge is liquidated.
Our calculation of lost investment income is based on the United States Department of the
Treasury's semiannual cost of capital rates.
Plan’s Comments (see Appendix):
The Plan does not dispute this finding.
8
Recommendation 2
We recommend that the contracting officer require the Plan to return $90,303 to the FEHBP
for lost investment income, calculated through December 31, 2013. On February 19, 2014,
the Plan paid the recommended lost investment income recovery in full through December 31,
2013.
9
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group
Auditor-In-Charge
, Lead Auditor
Chief
, Senior Team Leader
10
Exhibit A
Blue Choice
Summary of Questioned Costs
Defective Pricing Questioned Costs
Contract Year 2010 $396,332
Contract Year 2011 $846,099
Contract Year 2012 $810,800
Total Defective Pricing Questioned Costs $2,053,231
Lost Investment Income: $90,303
Total Questioned Costs $2,143,534
Exhibit B
Page 1 of 3
Blue Choice
Defective Pricing Questioned Costs
2010 - High
Self Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Bi-weekly Result
To Annualize Overcharge:
March 31, 2010 Enrollment
Pay Periods 26 26
Subtotal
Total 2010 High Option Defective Pricing Questioned Costs $278,703
2010 - Standard
Self Family
FEHBP Line 5 - Reconciled Rate $
FEHBP Line 5 - Audited Rate $
Bi-weekly Result
To Annualize Overcharge:
March 31, 2010 Enrollment
Pay Periods 26 26
Subtotal $
Total 2010 Standard Option Defective Pricing Questioned Costs $117,629
Total 2010 Defective Pricing Questioned Costs $396,332
Exhibit B
Page 2 of 3
Blue Choice
Defective Pricing Questioned Costs
2011 - High
Self Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Bi-weekly Result
To Annualize Overcharge:
March 31, 2011 Enrollment
Pay Periods 26 26
Subtotal
Total 2011 High Option Defective Pricing Questioned Costs $224,406
2011 - Standard
Self Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Bi-weekly Result
To Annualize Overcharge:
March 31, 2011 Enrollment
Pay Periods 26 26
Subtotal $
Total 2011 Standard Option Defective Pricing Questioned Costs $621,693
Total 2011 Defective Pricing Questioned Costs $846,099
Exhibit B
Page 3 of 3
Blue Choice
Defective Pricing Questioned Costs
2012 - High
Self Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate $
Bi-weekly Result
To Annualize Overcharge:
March 31, 2012 Enrollment
Pay Periods 26 26
Subtotal
Total 2012 High Defective Pricing Questioned Costs $741,060
2012 - Standard
Self Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Bi-weekly Result $
To Annualize Overcharge:
March 31, 2012 Enrollment
Pay Periods 26 26
Subtotal $
Total 2012 Standard Defective Pricing Questioned Costs $69,740
Total 2012 Defective Pricing Questioned Costs $810,800
Total Defective Pricing Questioned Costs $2,053,231
EXHIBIT C
Blue Choice
Lost Investment Income
Year 2010 2011 2012 2013 Total
Audit Findings:
1. Defective Pricing $396,332 $846,099 $810,800 $0 $2,053,231
Totals (per year): $396,332 $846,099 $810,800 $0 $2,053,231
Cumulative Totals: $396,332 $1,242,431 $2,053,231 $2,053,231 $2,053,231
Avg. Interest Rate (per year): 3.188% 2.563% 1.875% 1.563%
Interest on Prior Years Findings: $0 $10,156 $23,296 $32,092 $65,544
Current Years Interest: $6,317 $10,841 $7,601 $0 $24,759
Total Cumulative Interest Calculated
Through December 31, 2013: $6,317 $20,997 $30,897 $32,092 $90,303
165 Court Street National strength.
Excellus +.ll Rochester, NY 14647 Local focus.
Individual care.'M
ExcellusBCBS.com
Management
ce Inspector General
800 Cranberry Woods Drive
Suite 270
Cranberry Township, PA 16066
We have received the Draft report for the Aud it of Blue Choice Rochester, New York (Excellus BCBS)
Report No. 1C-MK-00-13-052.
Although we still dispute several of the find ings in the report, we are electing to submit the payment as
requested. The payment w ill be sent via electronic transfer. Please provide the information necessary
to wire the $2,143,534 to the appropriate account.
I wi ll be out of the office until February 4, 2014. If you could send the information via email to
at would allow us to begin processing the payment at the earliest time.
Cc: - Internal Auditor, Excellus Health Plan
- Director Underwriting, Excellus Health Plan
- Chief Actuary, Excellus Health Plan
-Account Manager, Excellus Health Plan
A NONPROFI T I I DEPENIEIT LICENS EE Of